Australian Dollar Holds Firm

The Australian dollar held firm around $0.694, maintaining last week's 0.7% gain, as a decline in the US dollar combined with expectations of further RBA rate hikes. Markets continued to assess the Reserve Bank of Australia’s June meeting minutes, which underscored policymakers' strong concerns over persistent inflation, excess demand, and capacity constraints. Major banks, such as the Commonwealth Bank of Australia said the minutes highlighted enduring inflationary pressures, while ANZ warned they reinforced the risk of another rate hike in the months ahead. Meanwhile, the greenback came under pressure from easing energy prices and a softer-than-expected US payrolls report, prompting markets to scale back expectations of a near-term Federal Reserve rate hike, with futures pricing a 78% chance that rates will remain unchanged at the July 29 meeting. Elsewhere, US-Iran peace talks showed no progress, but shipping through the Strait of Hormuz remained steady.

The Australian dollar strengthened for a second straight session to around $0.694 and was on track for a weekly gain, supported by hawkish interpretations of the RBA's June meeting minutes from major banks. While markets priced in only a 15% chance of an August rate hike and roughly 50% odds that the tightening cycle has ended, CBA said the minutes struck a hawkish tone, citing persistent references to excess demand and capacity constraints as signs the RBA remains alert to inflation risks. Likewise, ANZ said the minutes reinforced the risk of another rate hike while leaving its core rate call unchanged. The Aussie dollar also found support from a weaker US dollar after softer-than-expected employment data tempered expectations for further Fed rate hikes. Meanwhile, Australia's S&P Global Composite PMI was revised up to 50.4 in June from a preliminary estimate of 49.8, driven by a return to expansion in services activity (50.5 vs 48.7) and stronger manufacturing growth (51.5 vs 50.7).

The Australian dollar remained below $0.690, hovering near a three-month low as investors pared back expectations for further interest rate hikes, while weaker-than-expected trade data weighed on sentiment. The country unexpectedly posted a AUD 3.02 billion trade deficit in May, the largest since December 2015, as exports slumped to a four-month low, while imports climbed to a fresh record-high. Markets have also scaled back expectations for further rate hikes as easing global inflation risks after the reopening of the Strait of Hormuz drove oil prices back to pre-war levels. An August move by the Reserve Bank is now priced in at just 15% chance, while markets see a 50% probability that the tightening cycle has ended. Meanwhile, the Aussie remained under pressure from a broadly firm US dollar, as investors continued to price in a Fed rate hike in September despite Fed Chair Kevin Warsh saying inflation expectations had eased over the past month.